the 0.8 comes from the normality assumption, sqrt(2/pi) is approx 0.8, ill give you some time to think about where this comes from before spilling the beans - its nothing to do with Jensens inequality. Think in the line of Taylor Series f(x+h) = f(x) + f'(x)dh + 0.5*f''(x) (dh)^2+... where f'(x) is the first derivative of f wrt x and f''(x) is the 2nd deriv wrt x.(And i think Dave Angel is right - so in the case where you have a continuous price process then the above will hold given normality).
Last edited by DocToc
on January 9th, 2011, 11:00 pm, edited 1 time in total.